Friday, November 15, 2013

Scope of Federal Arbitration Act Allows Contractor to Compel Arbitration

In August, the Supreme Court of South Carolina addressed the reach of the interstate-commerce requirement of the Federal Arbitration Act (FAA). Cape Romain Contractors v. Wando E., LLC, 747 S.E. 2d 461 (S.C. 2013).  It also addressed whether an Owner could compel arbitration of a lien-foreclosure action filed by a subcontractor.

Map courtesy of Wikimedia Commons
Wando E. owns property along the Wando River. It hired Sean Barnes as its general contractor to build a marina along the river.  Barnes then subcontracted with Cape Romain Contractors to install pilings and a prefabricated, manufactured dock. 

A dispute arose between Barnes and Cape Romain after the project engineer refused to certify further payments due to problems with Cape Romain's work, including angled pilings and misaligned dock sections. Cape Romain insisted its work was correct and argued that the manufacturer was at fault.  The dispute could not be resolved, so Cape Romain filed a $158,413.14 lien on Wando E.'s property.

Cape Romain filed a lawsuit against Barnes and Wando E., alleging breach of contract and seeking to foreclose on the lien.The subcontract between Barnes and Cape Romain was an AIA form contract that required arbitration of disputes.  Thus, Barnes sought to compel arbitration and dismissal of the court case.  For its part, Wando E. wanted to tag along with Barnes to arbitration.  

The trial court, however, refused to compel arbitration. That court found that the contract between Barnes and Cape Romain did not impact interstate commerce sufficiently to "justify or trigger" application of the FAA.  The court also found that Wando E. could not compel arbitration with Cape Romain because they had not agreed to arbitrate and did not have a "special relationship" that justified applying the arbitration provision in the subcontract with Barnes.

The Supreme Court of South Carolina reversed on both issues.  To determine whether the FAA applied, the Court looked to decisions defining the extent of the Commerce Clause under the U.S. Constitution.  For commerce to be "interstate," the commerce either must use the "channels" of interstate commerce, use the "instrumentalities" of interstate commerce, or have a "substantial relation" to interstate commerce.  In this case, the Court held that all three prongs were satisfied -- the marina included raw materials originating in Ohio, Cape Romain used barges to bring materials up the Wando River through the Charleston Harbor (see the map, above), and the project was constructed in navigable waterways of the United States under a permit issued by the U.S. Army Corps of Engineers.  

As to Wando E.'s attempt to compel arbitration, the court declined to reach the question as to whether the attempt was valid on its own.  Instead, the court pointed to Section 21.6 of the Barnes/Cape Romain contract, which allows for, "joinder [of] persons or entities substantially involved in a common question of law or fact whose presence is required if complete relief is to be accorded in an arbitration" so long as that other party consents to joinder.  Since Wando E. consented to joinder, the South Carolina Supreme Court held that Cape Romain could not preclude  Wando E. from joining.  The case was then remanded with a stay imposed in the litigation below. 

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